U.S. Supreme Court Speaks on the False Claims Act

Perhaps this decision does not seem all that significant. California attorneys and relators know that the Ninth Circuit already held prior to this case that the FCA does not require automatic dismissal for a seal violation. However, the commentary about FCA suits made by the high court is worth paying attention to, for those prosecuting false claims, and the whistleblowers who report them.

The FCA, per 31 USC § 3729-3730, authorizes private parties known as relators to seek recovery from persons who make false or fraudulent claims to the government. The Attorney General may intervene in these actions, or may bring suit in the first place.  Relators receive a percentage of these claims, which are often in the millions, and are therefore incentivized to bring these suits. As noted by the Court, “this system is designed to benefit both the relator and the government.” State Farm, supra, at 438.

The FCA places a number of restrictions on relators. Most relevant to the State Farm v. Rigsby ruling is 3730(b)(2), requiring that an FCA complaint be kept under seal for at least 60 days “and shall not be served on the defendant until the court so orders.”  Id.

The facts of this case read like a best-selling novel. In the years before Hurricane Katrina, State Farm Fire and Casualty Co. (“State Farm”) issued two types of insurance policies: 1) Federal Government-backed flood insurance policies, paid by the government, and 2) State Farm’s own general insurance policies, paid by the Insurer. Two State Farm adjusters, Cori and Kerri Rigsby, were responsible for visiting damaged homes of State Farm’s customers to determine the amount of money a homeowner was entitled to for the damage to their home. According to the Rigsbys, State Farm instructed them and other adjusters to misclassify wind damage as flood damage, in order to shift State Farm’s insurance liability to the government.  The Rigbsys acted as the relators in this action, and filed their complaint under seal in April 2006. At the Government’s request, the District Court extended the length of the seal a number of times, ultimately lifting the seal in part in 2007, and in full in August 2007.

In the months before the seal was lifted in part, the Rigsbys’ then-attorney, Dickie Scruggs, emailed a sealed evidentiary filing to journalists at ABC, the Associated Press and the New York Times, which all released stories about the fraud. The Rigsbys also met with a Mississippi Congressmen. After the seal was lifted in part, Scruggs disclosed the existence of the suit to various others. None of these disclosures mentioned the existence of a FCA complaint. 

Mr. Scruggs withdrew from representing the Rigsbys after he was indicted for attempting to bribe a state-court judge. Stranger still, the District Court later removed the remaining Scruggs-affiliated attorneys from the case, based on their alleged involvement in improper payments made from Scruggs to the Rigsbys. 

State Farm moved to dismiss the complaint, due to the fact that the seal was broken prior to the 60 day limit. The District Court applied a 3-part test and ruled against dismissal, partly because Scruggs’ disclosures did not mention the FCA filing. The U.S. Supreme Court agreed, and found that a seal violation does not mandate dismissal of a relator’s complaint.

Specifically, the Court found that Section 3730(b)(2) was enacted as part of a set of reforms meant to “encourage more private enforcement suits.” The purpose behind the seal provision was to allay the Government’s concern that a relator filing a civil complaint would alert defendants to a pending federal criminal investigation. In other words, the seal requirement was intended to protect the Government’s interests, and it would make little sense to adopt a rigid interpretation of the seal provision that prejudices the government by depriving it of needed assistance from private parties.

Practitioners and relators are smart to read between the lines of this decision. Notably, State Farm never requested a lesser sanction than dismissal, so the discrete issue before the Court was whether dismissal was mandated for a seal violation. The Court admonished however, that the relator must follow the seal rule, and dismissal certainly remains a possible form of relief under the right circumstances. Remedial tools like monetary penalties or attorney discipline also remain available to punish and deter seal violations. The question whether dismissal is appropriate is up to the discretion of the trial courts. 

The Court also waned in dicta about the purposes of the FCA. The aim of FCA litigation was reinforced by the Court as among other things “’encourag[ing] more private enforcement suits’ to ‘strengthen the Government’s hand in fighting false claims.’” Id. at 438. The Court sung the praises of the FCA as a structural policing agent against fraudulent business practices. The case is dotted with citable nuggets for FCA legal practitioners and at the very least, helps lay the landscape for a favorable view of relators and their attorneys moving forward.

If you know of a company that is defrauding the government either by way of contract, or by fraudulently receiving government reimbursements, contact Niall McCarthy, Justin Berger or Tamarah Prevost, of Cotchett, Pitre & McCarthy at 650-697-6000. 


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